Kahala Financials 2015
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Kahala Brands, Ltd. Consolidated Financial Statements - Year Ended December 31, 2015 (Expressed in US Dollars, unless otherwise noted) Independent Auditors’ Report To the Board of Directors of Kahala Brands, Ltd. We have audited the accompanying consolidated financial statements of Kahala Brands, Ltd., which comprise the consolidated statement of financial position as at December 31, 2015, and the statements of income and comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Kahala Brands, Ltd. as at December 31, 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other Matter Without modifying our opinion, we draw attention to Note 6 to the financial statements which indicates that the comparative information presented as at, and for the year ended December 31, 2014, has been corrected. As part of our audit of the financial statements as at, and for the year ended December 31, 2015, we audited the correction described in Note 6 to the consolidated financial statements that was applied to correct the comparative information presented as at and for the year ended December 31, 2014. In our opinion, the correction is appropriate and has been properly applied. Mississauga, Ontario Chartered Professional Accountants May 27, 2016 Licensed Public Accountants 1 Kahala Brands, Ltd. Consolidated Statement of Financial Position As At December 31, 2015 2014 2015 (restated - note 6) ASSETS Current Assets Cash $ 10,425,755 $ 8,487,998 Restricted cash 187,269 - Accounts receivable 13,153,609 14,285,985 Prepaid expenses 5,405,688 3,187,009 Notes receivable, current portion (note 7) 1,481,061 637,541 Deferred rent asset, current portion (note 21) 548,301 1,473,998 Income taxes recoverable (note 17) 5,791,122 2,000,000 Assets held-for-sale (note 8) 1,965,960 1,112,568 38,958,765 31,185,099 Notes receivable (note 7) 1,909,395 3,012,948 Property and equipment (note 9) 232,835 23,333 Deferred tax asset (note 17) - 1,000,000 Deferred rent asset (note 21) 15,535,511 17,806,006 Intangible assets (note 10) 63,310,576 58,479,609 Goodwill (note 10) 65,925,377 67,149,341 Total assets $ 185,872,459 $ 178,656,336 LIABILITY AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities (note 11) $ 13,227,773 $ 12,542,000 Deferred revenue and deposits, current portion (notes 6 and 12) 5,563,379 4,545,505 Deferred rent liability, current portion (note 21) 733,256 1,518,459 Unredeemed gift cards liability 56,821,648 55,048,392 Notes payable, current portion (note 13) 41,195 4,306,406 76,387,251 77,960,762 Deferred revenue and deposits (notes 6 and 12) 5,664,436 2,800,537 Deferred rent liability (note 21) 16,087,050 18,458,770 Deferred tax liability (note 17) 1,572,237 - Notes payable (note 13) 160,033 11,518,960 99,871,007 110,739,029 Shareholders' equity Share capital (note 15) 62,774,986 62,774,986 Treasury share (163,750) (163,750) Contributed surplus 159,805,067 159,805,067 Deficit (136,415,843) (154,499,988) Accumulated other comprehensive income 992 992 86,001,452 67,917,307 Total liabilities and shareholders' equity $ 185,872,459 $ 178,656,336 Nature of operations (note 1) Commitments and contingencies (note 16) Approved on behalf of the Board _________________________ _________________________ Signed: CEO Signed: President The accompanying notes are an integral part of these consolidated financial statements. 2 Kahala Brands, Ltd. Consolidated Statement of Income and Comprehensive Income For the Year Ended December 31, 2015 December 31, 2015 December 31, 2014 Revenue (notes 18 and 21) $ 120,944,458 $ 129,661,631 Cost of sales (note 19) 22,504,457 28,335,068 98,440,001 101,326,563 Expenses Rent (note 21) 41,743,963 52,470,887 Salaries and benefits (note 14) 16,241,325 17,027,465 General and administrative (note 20) 10,835,546 10,218,222 Depreciation and amortization (notes 9 and 10) 2,669,148 2,807,190 71,489,982 82,523,764 Other (income) loss Gain on disposition of investment in CSC Japan, LLC - (2,288,586) Impairment of transitional stores 846,858 277,744 Impairment of notes receivable 166,699 2,500,000 Impairment of property and equipment, intangible assets and goodwill 3,800,000 1,700,000 (note 10) (Gain) loss on disposition of assets (notes 8 and 9) 98,999 (632,003) Foreign exchange (gain) loss 6,711 1,634 Interest Income (197,573) - Interest expense 301,230 1,033,730 5,022,924 2,592,519 Income before income taxes 21,927,095 16,210,280 Income tax provision (recovery) (note 17) 3,842,950 (1,000,000) Net income 18,084,145 17,210,280 Foreign exchange translation on foreign operations - 992 Comprehensive income $ 18,084,145 $ 17,211,272 The accompanying notes are an integral part of these consolidated financial statements. 3 Kahala Brands, Ltd. Consolidated Statement of Changes in Equity For the Year Ended December 31, 2015 Accumulated Total Treasury Contributed Other Common Shares Deficit Shareholders' Shares Surplus Comprehensive Equity Income Balance at December 31, 2013 $ 62,774,986 $ - $ 159,903,317 $ 910,751 $ (169,219,354) $ 54,369,700 Correction of error (note 6) - - - - (2,490,914) (2,490,914) Balance at December 31, 2013 (restated - note 6) $ 62,774,986 $ - $ 159,903,317 $ 910,751 $ (171,710,268) $ 51,878,786 Sale of investment in CSC Japan, LLC - - - (910,751) - (910,751) Repurchase and redemption of shares - (163,750) (98,250) - - (262,000) Foreign exchange translation - - - 992 - 992 Net income for the year - - - - 17,210,280 17,210,280 Balance at December 31, 2014 (restated - note 6) $ 62,774,986 $ (163,750) $ 159,805,067 $ 992 $ (154,499,988) $ 67,917,307 Net income for year - - - - 18,084,145 18,084,145 Balance at December 31, 2015 $ 62,774,986 $ (163,750) $ 159,805,067 $ 992 $ (136,415,843) $ 86,001,452 The accompanying notes are an integral part of these consolidated financial statements. 4 Kahala Brands, Ltd. Consolidated Statement of Cash Flows For the Year Ended December 31, 2015 December 31, 2015 December 31, 2014 Operating Activities Net income $ 18,084,145 $ 17,210,280 Items not affecting cash: Deferred income taxes 2,572,237 (1,000,0000 Depreciation of equipment 36,696 1,667 Amortization of intangible assets 2,632,452 2,805,563 (Gain) Loss on disposition of assets 98,999 (482,081) Impairment of notes receivable 166,699 609,510 Interest on notes payable and receivable - 1,036,768 Impairment expense 4,646,858 4,477,794 Accounts receivable converted into notes - (2,914,438) Accounts payable converted into notes - 183,917 Non cash rent expense (income) - (427,832) (Gain) Loss on disposition of CSC Japan, LLC - (2,288,586) Changes in non-cash operating working capital: Accounts receivable 1,966,860 2,904,158 Prepaid expenses (972,624) 458,715 Accounts payable and accrued liabilities (1,952,810) (2,851,254) Deferred revenue and deposits 3,638,365 (3,235,757) Deferred rent asset 3,218,603 - Deferred rent liability (3,465,006) - Unredeemed gift cards liability (272,538) 3,883,926 Income taxes refundable (3,791,122) (2,000,000) Cash provided by operating activities 26,607,814 18,372,350 Investing Activities Proceeds from disposition of transitional stores 151,500 1,924,202 Acquisition of transitional stores (281,046) (296,157) Purchase of equipment (105,186) (25,000) Acquisition of Tasti D-Lite, net of cash received (1,609,928) - Acquisition of Maui Wowi, net of cash received (3,771,487) - Acquisition of Pinkberry, net of cash received (3,242,633) - Proceeds from disposition of equipment - 7,744,756 Proceeds from disposition of CSC Japan, LLC - 3,212,900 Cash provided by (used in) investing activities $ (8,858,780) $ 12,560,701 Continued on next page The accompanying notes are an integral part of these consolidated financial statements.